Court Finds No ERISA Shield in Insider Trading
Concerns

>The US District Court for Southern Ohio said that
American Electric Power Co. (AEP) would not have violated
insider trading rules if it had disclosed non-public
information regarding the company to its employees.

>In denying AEP’s motion to dismiss a class-action
suit brought by employees in July of 2003 regarding the
company’s 401(k) plan, Judge Algenon L. Marbley stated that
the fiduciary would not have been in violation of insider
trading rules by complying with ERISA obligations.
“A fiduciary cannot escape liability merely by pointing to
the Plan as requiring it to act as it did,” Marbley said in
his opinion.

>The suit alleges that AEP and its representatives
breached their fiduciary duties by continuing to offer
company stock options in the company’s retirement plan when
it was clear that it was imprudent to do so.

>Siding with numerous other courts – including cases
involving Enron, CMS Energy, and McKesson HBOC – Marbley
asserted that because AEP, in their plan document, gave the
fiduciaries the option of halting trading of the AEP Stock
Fund, disclosing the non-public information, and then
selling the fund shares as an option, the Defendants’
claims of conflict with insider trading rules held no sway.
Thus, the Court dismissed the defendants’ claim that they
“lacked the power, authority or discretion to take such
action.”

>In asserting its motion to dismiss the case, AEP
claimed that, among other things, the suit failed to
adequately show that each defendant was a plan fiduciary.
Additionally, the defendants claimed that under section
404(c) of ERISA, the fiduciary of an individual account
should not be liable for the investment choices made by
plan participants. These claims were rejected by the court,
which ruled that both were issues that should be decided at
trial.

>Finally, the Court refused to accept AEP’s argument
regarding a presumption of reasonableness. Because it was
an employee stock ownership plan, the Defendants argued,
AEP’s plan was entitled to a presumption of reasonableness
regarding the decision to remain invested in the company
stock. The Plaintiffs claim that this presumption would not
apply because the plan was not an Employee Stock Ownership
Plan (ESOP). Whether or not the plan was an ESOP, the court
argued in dismissing the claim, was something that must be
decided at trial.